June 8, 2020
By Dennis Kaiser
The current economic landscape in the United States is volatile and there’s plenty of uncertainty to go around. Navigating the challenges ahead will require patience, time and savvy leaders to guide the commercial real estate industry and their companies through to solid footing.
Connect Media looked to Colliers International’s Gil Borok, President and CEO of its United States business, to share his thoughts about the approach the firm is taking today. Based in Los Angeles, he is responsible for managing the strategic direction of Colliers’ rapidly growing U.S. business and offers a host of insights into ways they are helping clients plan for the future. The CRE Q&A below touches on such issues as rent relief, office demand post-COVID-19 with remote workers, changes needed to resume operations and a return to workplaces.
Q: What are the biggest challenges the commercial real estate sector faces in the COVID-19 era?
A: Rent relief issues are tricky in the current environment. Leases are contractual agreements that need to be respected. It is important that only tenants who really need rent relief and other modifications request it so that landlords can try to accommodate those who truly need it. Landlords have bills to pay and debt to service, so they don’t have endless capacity to help their tenants.
The projections for the office market continue to be a “wait and see,” with the belief that the markets will likely shift to be more favorable for tenants. With more people now working from home, we are seeing occupiers reevaluate their space requirements. The initial success of remote working could lead to a reduction in space needs but this will surely be offset by the need for more space to accommodate social distancing in the near term and the need for physical interaction, for which there is no substitute, longer term. The return to work will be gradual and will require a change in behavior in the office – in addition to social distancing, increased hygiene protocols, the wearing of masks, the taking of temperatures and the closure of many amenities will be some of the aspects of the “new normal.” Many office occupiers will continue to allow employees to work from home for the foreseeable future so as to minimize the cost of reconfiguring space for a situation that will eventually pass.
The projections for the industrial market differs significantly from that of the office market, with landlords becoming bullish that manufacturing will continue to come back to the U.S. and e-commerce will become an even stronger presence in the asset class.
The retail space has been hardest hit by the pandemic, as stores have had to close to comply with regulations and stop the virus’s spread. It will take a long time for this sector to recover and the truth is that many smaller retailers and hospitality establishments will not survive.
The flexible workspace sector is taking a big hit as well and is grappling with health and safety concerns once employees return to space that is inherently shared.
Given the uncertainty surrounding the timetable of COVID-19 and the ensuing short-term and long-term impacts of the shutdown of the economy, there is a definite hesitancy currently in capital markets. There is liquidity available and there are still some deals transacting, particularly those that do not rely on the debt markets for closing.
Q: What do you see ahead for the commercial real estate industry?
A: A clearer picture will emerge as we move through the second quarter, which will be the initial quarter to be fully impacted by the pandemic. A key factor for 2020 will be the extent to which the economy can re-open and confidence returning in the second half of 2020. For commercial real estate, this is not about fundamentals but rather about an effectively shuttered economy.
Q: What advice do you have to navigate the challenges as the COVID-19 situation evolves?
- Try to be accommodating
- For those tenants who truly need rent relief, we are seeing landlords offer accommodations such as:
- Free rent for a few months amortized over the remainder of the lease term beyond the new free rent period
- Free rent for a month or two in exchange for additional term
- Waiving of parking and amenity commitments for a month or two while tenants mostly work from home
- Consider short-term renewals
- Consider blend and extend leases
- In turn, work with lenders for debt service relief if needed
Q: How are market fundamentals shifting and how should the industry adjust to prepare for what’s next?
A: Currently, visibility is very limited. It is advisable for brokers to keep the lines of communication with their clients open and provide expert advice as they navigate this situation. Taking a measured, conservative approach for now (ex. modifications to but not major redesign of workplaces and the way people occupy them) until there is more visibility seems prudent. The key is for landlords and tenants to partner in good faith to successfully navigate this health crisis induced slowdown.
Q: What should properties be doing to be ready to reopen or come back to full operations?
A: Colliers’ Workplace Advisory Team conducted extensive research and discussions with our clients around the world and divided actions that space occupiers will need to take, to ready their workplaces for their employees’ return, into five categories. These five categories include design and space changes, new behaviors, communication and navigation, hygiene and cleaning, and technology.
To help maintain the six-foot social distancing recommended by the Center for Disease Control (CDC), some modifications will need to be made to space layouts and design. This includes alternating utilized workstations, possibly installing temporary clear plastic panel barriers at the reception desk, creating one-way clockwise paths through the space, and putting marks on floor to indicate safe six-foot queuing distances. In regard to hygiene and cleaning, hand sanitization dispensers should be prominent throughout the space, disposable towels/wipes to clean work surfaces daily should be provided, thermometers should be available, and signs to enforce distance rules, hand washing, sanitization and wearing of masks in public areas should be visible. Lastly, if possible, touchless door openers, touchless/motion activated toilets, faucets, soap and paper towel dispensers should be installed.
These are only a sampling of the initiatives that companies should be taking to get their workplaces ready for their employees’ return.
For comments, questions or concerns, please contact Dennis Kaiser